Ron Johnson, former CEO of JC Penney who initiated the partnership with MSLO, was counting on Martha to be the centerpiece of JC Penney’s reimagined housewares department. As the retailer struggled under his leadership, he was replaced by the current CEO, Mike Ullman. Unfortunately, Ullman either doesn’t share Johnson’s faith in the Martha brand, or he thinks that the national retailer should be focused elsewhere–or both. The expensive lawsuit that JC Penney’s has been fighting with Macys in a NYC courtroom is almost certainly influencing his decision, as well

So, he has decided to scale back significantly JC Penney’s partnership with Martha. Here’s what’s changing:

– JC Penney’s will discontinue selling products in those categories that prompted the lawsuit from Macys.

– JC Penney’s will sell back its share ($37 million worth!) of MSLO stock purchased as part of the partnership.

– JC Penney’s will no longer have representation on the MSLO Board of Directors

Not great news for Martha and MSLO, where a great portion of revenue is generated by licensing the “Martha Stewart” name. Martha was hopeful that the products offered at JC Penney’s would reach audiences currently unserved by the products sold at Macy’s.

Still, the JC Penney’s partnership will continue, though CEO Ullman seems less devoted to Martha and her products. And the partnership with Macy’s will continue, though Macy’s CEO Terry Lundgren became furious with Martha when she told him of her new relationship with JC Penney’s. Of course, neither CEO would be interested in continuing his partnership with Martha if she and her products were not so popular with the public.

To most following the Martha vs. Macy’s trial, it looks very unlikely that Martha and JC Penney will prevail. In a nutshell: Although Martha’s contract with Macy’s did, in fact, allow for Martha to open stand-alone Martha Stewart stores that offer products in categories–housewares, bedding, bath, and cookware–that would compete with those items offered at Macy’s, the idea that Martha’s “store within a store” actually qualifies as a “stand alone” seems dubious, at best. Ron Johnson, the JC Penney CEO who developed the “store within a store” idea and created the partnership with MSLO, was ousted in April 2013. His predecessor, Mike Ullman, was reappointed to take over the company and has shown little to no enthusiasm for the plan.

Yesterday, reports surfaced that Penney’s was planning to discontinue offering products designed by Martha Stewart in those categories deemed exclusive in Martha’s contract with Macy’s, effectively throwing in the towel to end the ongoing lawsuit. More worrisome are reports that JC Penney was also ending its entire partnership with Martha, and would not be selling any Martha Stewart products, even in categories that did not impinge upon the Martha-Macy’s contract. According to one insider, CEO Ullman has said, “Her designs aren’t that great. They’re not selling, and they’re nothing that your normal Joe Schmoe can’t come up with.”

Further complicating the matter is the fact that, as part of its partnership with MSLO, JC Penney purchased a 16.6-percent stake in MSLO, infusing the cash-strapped company with $38.5 million. Obviously, MSLO would prefer to see their partnership with JC Penney continue. A MSLO spokesperson has released as statement saying, “J.C. Penney remains one of our many retail partners. Our agreement with them is in force, and we have no intention of ending it.”

If JC Penney does end its partnership with Martha, it is expected that MSLO will sue JC Penney to enforce the contract, unless there is specific language in the contract allowing JC Penney to end it at any time. MSLO had projected its merchandising agreement with JC Penney to generate $200 million dollars in much-needed revenue for the company over the next several years. MSLO has become increasingly dependent upon revenue generated through licensing and merchandising agreements, as sales through its magazine divisions have slowed and Martha’s presence on television has diminished. MSLO stock prices sunk when the news of the end of its JC Penney partnership was leaked.

Ullman, a former Penney CEO who returned to the helm in April to repair damage from a disastrously unsuccessful turnaround effort by Johnson, began to broadcast the split with the beleaguered domestic diva to workers in recent weeks, insiders said.

However, Ullman was determined to give Stewart the boot from the get-go, insiders said.

As reported by The Post, Ullman initially reached out to Macy’s CEO Terry Lundgren to settle the lawsuit, which had already gone to trial with dramatic testimony from Lundgren, Johnson and Stewart herself.

If you have been following the trial, you likely remember that the judge in the case ordered the parties into mediation while the trial was in recess, in the hope that they could resolve the dispute without a ruling from the court. No such settlement emerged, and so the trial will resume again next Monday. Much is on the line, especially for J.C. Penney and MSLO, as both companies have lately had disappointing financials. Macy’s, seen as the likely beneficiary of a court ruling, has essentially no reason to negotiate or settle with the other parties.

The three parties Macy’s, J.C. Penney and Martha Stewart Living Omnimedia were sent into mediation by the officiating Judge Jeffrey Oing. He had hoped to resolve the dispute mutually during the time the non-jury trial was in a recess owing to the conflicts in the schedule.

However, even on Friday there was no evidence of any deal being stuck and witnesses would be testifying the same in the early part of this week according to a person who knows the case. The person who was not authorized to speak publicly and wished to remain anonymous told that the witnesses might include a few J.C. Penney marketing executives.

The new house line of home goods at JC Penney, “JCP Everyday”, is now on sale in stores and online! It is well-known that these products were designed by MSLO employees, although they are not allowed to carry the “Martha Stewart” name, pending resolution of the current court case. Some things I noticed as I viewed the items online:

2. Most of the products look nothing like similar items for sale at Macy’s as part of the Martha Stewart Collection. True, the pasty bags at one retailer look like the pasty bags at the other–but that’s because of the design requirements inherent in those particular items.

3. I’m intrigued by the “JCP Everyday” logo (see cookie cutters image above, bottom row at right). The two overlapping houses do, in fact, make an “M”, don’t they? Macy’s brought this up in the court case, as they sought an injunction to halt the sale of these items, even though they do not carry the “Martha Stewart” name on them. The judge denied Macy’s request, and they have appealed. Further, these items are not allowed to be sold in the Martha Stewart stores-within-stores at JC Penney, nor be placed anywhere nearby, pending the outcome of the current court case–a step taken to minimize harm to Macy’s, should they ultimately prevail in court.

FOMs: What do you think? My own message to Macy’s is this: Calm the heck down, would you? It’s clear Martha and her team have no intention of cannibalizing their own profits generated by sales at Macy’s. That wouldn’t be very smart, would it?

First, it may be useful to back up a bit: The case is actually made up of several different claims, including breach of contract, breach of confidentiality, unfair competition, and tortious interference. In some claims, Macy’s has won injunctions, which are essentially temporary smaller rulings in Macy’s favor while the larger issues are resolved permanently in the courtroom. For example, in one injunction, the judge ruled that Martha may NOT sell items in JC Penney stores until the issue of exclusivity has been resolved completely. Macy’s asked the judge to broaden that existing injunction to include items that were designed by MSLO designers but did NOT have Martha’s name on them. These items are instead branded as “jcp Everyday”. Martha insists that these items–$100 million worth of them are already at distribution centers awaiting shipment to JC Penney stores–do NOT violate the exclusivity clause of her contract with Macy’s. Good News: Today, the judge sided with Martha, so these “jcp Everyday” items will begin appearing in JC Penney stores very soon!

However, the judge ruled that the trial would continue on to the next phase. You see, up to this point, Macy’s has been doing all the talking, as they present their case that MSLO violated the exclusivity clause of their contract. Today, the judge took into account all that Macy’s has presented thus far and agreed that may in fact be true. That’s the bad news. The good news is that the trial now shifts to a new phase; one in which MSLO gets to present THEIR side of the story to counter Macy’s claim. Go get ’em, Team Martha!

It is important to note that the judge in this case is still imploring the three parties involved to reach a settlement among themselves, without a judge’s ruling. Contract disputes such as this one are not entirely uncommon, and are often resolved with a financial settlement. In this case, JC Penney and MSLO could buy-out Macy’s contract (or just the exclusivity clause of the contract) although that seems unlikely, given the degree to which Macy’s seems to rely on the Martha Stewart Collection to generate traffic in its stores. By allowing the trial to go forward, and relying on the judge’s ruling, either party risks losing entirely.

Yesterday, the New York Times had an article on the subject underlying the current court case between Macy’s and MSLO: that it is essentially “a schoolyard fight between two boys — the chief executives of Macy’s and J. C. Penney — over the most popular girl on the playground.”

If you have been following MSLO lately, you would not be blamed for worrying about the current state of the company–the stock price has plummeted and stabilized at the low end, the company is heavily vested in traditional media (which is undergoing much tumult industry-wide) and has suffered layoffs, it has all but lost its television presence, and there is unsettled leadership (former CEO Lisa Gersh stepped down after only five months at the helm). The one fiscal bright spot at the company of late has been its merchandising. Simply, Martha is still seen in the eyes of the public as an arbiter of good taste and high quality, and most importantly, consumers trust her. If Martha says it’s a good thing–you can be sure it’s a good thing.

It is Martha’s reputation for producing good products that the two retail giants–Macy’s and JC Penney’s–are hoping to leverage in their stores. Indeed, embattled JC Penney’s CEO Ron Johnson’s job may depend on his Martha Stewart-anchored plan to resuscitate that company’s housewares department. And, as the Associated Press reported:

“[Macy’s CEO Terry] Lundgren said Macy’s has spent 40 percent of its overall marketing on the Martha Stewart brand and other labels in the home area, even though the home category represents 17 percent of total sales. That’s because even though the home area is typically slow turning, it drives shoppers to the store. “I need the Martha Stewart business to be exclusive,” Lundgren said. “I don’t have a substitute.”

The judge ordered the three companies into mediation on Friday, in an attempt to have them resolve the issues themselves without a court-ordered judgement. So, even as the courtroom drama continues, one thing is for certain: the Martha Stewart brand is still as strong as ever in the eyes of consumers. And that is most definitely a good thing for MSLO.

It is easy to forget that Ms. Stewart altered the way that people live by decoupling class and taste. Part of the reason that she seems embattled — her media empire is shrinking fast — is that she won her corner of the culture war. When you go into Target or Walmart and see a sage green towel that is soft to the touch, it may not carry her brand, but it reflects her hand. Her tasteful touch — in colors, in cooking, in bedding — is now ubiquitous; she just doesn’t get to cash all the checks anymore.

I’ve always been fascinated by retail merchandising and the way it responds to human behavior in order to facilitate sales. When I have a moment, I make it a point to visit Macy’s to see the Martha Stewart Collection. I like to spot new items and pay attention to the way the line is being merchandised by Macy’s. Obviously, placement in the store–near high-traffic areas, in very visible locations, with plenty of room to display adequate stock–is key to successful sales. Sadly, the San Francisco flagship store has not done well by Martha, I’m afraid. In the photo above, you can barely see the Martha Stewart Collection’s whiteware items, whereas Macy’s house brand, The Cellar, is positioned prominently by the aisle. If you look carefully in this photo, you can see the large table of whiteware behind the tall fixture with the blue Martha Stewart logo on it. (The right-hand edge of the table is to the right of the tired shopper, seated and talking on her mobile phone.) Also notice the lighting in this photo: The Martha Stewart logo is in shadow, while the well-stocked table of The Cellar items has three bright lights directly overhead.

Elsewhere in the Housewares Department, I found plenty of Martha Stewart Collection items in the middle of the aisle. Unfortunately, these were all on clearance. They were marked down, and shoppers could enjoy an additional 30-percent off the lowest price. The rear wall in this photo is lined built-in shelves, stocked with Martha Stewart Collection cookware. Only problem is, this wall is literally the farthest away from the escalators and elevators that service this basement level. In both photos, the clearance areas are directly adjacent to these locations–and you can bet Macy’s isn’t placing clearance tables in what they consider the “prime” areas of the floor.

It is also worth noting that these are NOT the locations on this floor where the Martha Stewart Collection could be found when it launched in 2007. Then, the collection was placed very prominently in the store, and merchandised beautifully with table settings and seasonal displays. Subsequently, this floor went through a number of remodels and the Martha Stewart Collection was moved to the less-desirable locations shown in these photos. I mention this because, as part of the countersuit against Macy’s, MSLO is claiming that Macy’s has not properly supported the Martha Stewart Collection in its stores. The countersuit claims that Macy’s has demoted the collection to “loss leader” status–whereby it advertises the collection but once shoppers come into the stores, they are presented with Macy’s house brand items (which are more profitable for the store) that are better positioned and better stocked. Based on what I observed this past Saturday, I’d say MSLO is spot-on.

Macy’s CEO Terry Lundgren is scheduled to be deposed tomorrow as part of the court case, and the hearing is scheduled for July 13. At stake is MSLO’s ability to open the Martha Stewart shops inside J.C. Penney stores in 2013.

If you’re interested, you can read about a previous Macy’s Expedition here.